Macro Matters: Geopolitics Dominates Narratives—for Now

Our economic outlook:

Global growth expectations have been trending lower from a high base since late 2025, with rising geopolitical tensions in the Middle East driving a further rerating and sharper regional divergence. A prolonged conflict will likely weigh on activity through higher energy and broader commodity prices, with spillover from agriculture to semiconductor inputs. Purchasing Manager’s Index numbers have softened—particularly in services—while higher bond yields are tightening financial conditions and pressuring public balance sheets. Increased equity and rates volatility are likely to dampen consumer sentiment via negative wealth effects, as emerging stress in private credit markets raises the risk of tighter liquidity if spreads widen. While governments may provide limited fiscal support to offset energy costs, strained public finances could cap the response. Europe and parts of Asia are most exposed given weaker starting points, while the U.S.—despite being a commodity producer—is also losing momentum. Unlike 2022, the current shock is largely supply driven and hits against a weaker consumer backdrop, raising the risk that high prices ultimately undermine demand.

Inflation remains uncomfortably sticky. The U.S. Core Personal Consumption Expenditures (Core PCE) Price Index has moved back above 3%, with limited progress in core goods inflation—partly tariff related—while higher producer prices and energy costs have pushed near term inflation expectations higher. Rents are gradually easing, but after five years of above target inflation, the Fed’s appetite to cut rates is low. Outside the U.S., the ECB and Bank of England have turned more hawkish, revising inflation paths upward, while the Bank of Japan remains the key dovish outlier. Rate markets have repriced sharply: from multiple expected cuts to none in the U.S., and from cuts to potential hikes in Europe. While long term inflation expectations remain relatively anchored, shorter term expectations have rerated meaningfully higher. Our base case remains a Fed on hold and data dependent, but we believe Europe faces a higher risk of policy error, where rate hikes in a weak growth environment would likely tip the economy into recession.

Prospective changes to asset allocation:

• Equities
  We’ve been moderating our broader exposure to equities for some time, getting more nuanced in our choices. We take a more cautious approach of overweighting U.S. equities over international equities—a shift from our long-held view. The U.S. being a net exporter of energy (though there is nuance here), combined with a stronger U.S. dollar, should help shield the U.S. economy from higher energy prices. Developed ex-U.S. and emerging market (EM) equities remain cheaper and attractive in the long-term, though weaker currencies, more hawkish central banks, and higher reliance on energy imports are likely to cause higher market volatility. However, short-term sentiment shifts will likely lead to plenty of noise in these markets.
• Fixed income
  We remain neutral on U.S. duration overall, with a preference for the medium part of the curve while underweighting the long end of the curve. Rates in developed ex-U.S. markets have risen sharply, and we see the prospect of longer-term attractive entry levels given attractive all-in yields. We also reduced the majority of our underweight views on duration, as we favor moving to neutral while realizing profits.
• Commodities and foreign exchange (FX)
  We continue to favor commodities, with a particular focus on energy. Energy commodities remain supported by the lasting damage of energy infrastructure in the Middle East. From a currency perspective we remain positive on selected countries benefiting from the commodity boom, insulation from tensions, and broader strength in the underlying economies, including the Brazilian real and Mexican peso.

Multi-asset allocation views:

These multi-asset views reflect tilts to our strategic asset allocation models and are based on a 6- to 12-month time horizon, driven by both quantitative and fundamental research.
+ (Overweight on overall asset class)    
= (Neutral on overall asset class)  
– (Underweight on overall asset class)

Forward investment implications:

Duration is a measurement of the sensitivity of a bond’s price to changes in Treasury yields. A fund’s duration is the weighted average of duration of the bonds in the portfolio. Duration should be interpreted as the approximate change in a bond’s (or fund’s) price for a 100-basis-point change in Treasury yields. Duration is based on historical performance and does not represent future results.

Hedging a bond means using a separate investment to offset the potential risks of the bond.

Core Personal Consumption Expenditures (Core PCE) Price Index
The Core Personal Consumption Expenditures (Core PCE) Price Index reflects changes in the prices of goods and services purchased by consumers in the U.S. but excludes food and energy. The Core PCE Index is a subset of the Personal Consumption Expenditures (PCE) Price Index but is intended to provide a smoother view of underlying, long term inflation trends by removing food and energy prices, which can swing widely due to weather, geopolitics, or commodity shocks. You cannot invest directly in an index.

Personal Consumption Expenditures (PCE) Price Index
The Personal Consumption Expenditures (PCE) Price Index reflects changes in the prices of goods and services purchased by consumers in the U.S. It is part of the Personal Income and Outlays Report issued by the Bureau of Economic Analysis of the U.S. Department of Commerce. You cannot invest directly in an index.

Purchasing Manager’s Index
The Purchasing Managers’ Index is an economic indicator that gauges sentiment in manufacturing, based on monthly surveys of purchasing managers. You cannot invest directly in an index.

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This material is provided for informational purposes only and is intended for retail public distribution in the United States. Use outside the United States is for professional/qualified investors only.

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